Capital punishment and punishment in capitals: the problem of white-collar crime in Canada

July 2016 | SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2016 Issue

Canada has been rocked by a series of corruption scandals that led to the defeat of our last two prime ministers and the creation of a widespread commission of inquiry into the connection between construction fraud and political bribery. With each scandal has come a range of legislative and law enforcement changes that have changed the way business is done in Canada. Now is a good time for a broader discussion of how Canada investigates, punishes and deters white-collar crime.

In Canada today, prosecutors have just three options if they believe a corporate executive has engaged in unlawful conduct. They can try to negotiate a guilty plea, go to court in hopes of securing a conviction, or opt not to bring charges – nothing new here. The problem is that we have new ‘integrity’ regimes that now ‘de-bar’ or prohibit companies from doing business with certain public institutions for an extensive period of time if a company and its executives plead, or are found, guilty. As a result, there is a strong disincentive for firms to report corruption or cooperate with authorities – do so and you are out of business or out of work if you do a lot of work for public authorities. If your business is located in a local, provincial or national capital region, this dramatically impacts the entire private sector of your region as a great deal of your business is, of necessity, with a public agency, department or government. With such a draconian result, Canadian prosecutors, inexperienced in white-collar crime, can recommend against prosecution in good conscience because it would prevent a large private employer from conducting business with the government for a decade – in many cases that amounts to corporate capital punishment. As a result, we have a no prosecution/prosecution dichotomy that will destroy local companies in government centres. Even the charging decision itself can result in customers changing suppliers for fear that an eventual finding of guilt will put a key supplier out of business. The charge itself may mean that many prosecuted companies don’t last long enough to have their day in court.

For years prosecutors in the US have been able to negotiate settlements involving white-collar crime that some believe result in a ‘win-win’ outcome. They can negotiate a settlement with the corporate defendant for crimes committed by its employees, subject to specified and onerous conditions. A deferred prosecution agreement (DPA) is a voluntary alternative to litigation in which a prosecutor agrees to grant amnesty in exchange for the defendant agreeing to fulfil certain requirements. In a case of corporate fraud, a case might be settled by means of a DPA in which the defendant agrees to pay fines, implement stringent internal controls, implement a corporate ethics policy and hire internal auditors and officers to police them, fully discloses all corporate wrongdoing, and fully cooperates with the investigation. Fulfilment of the specified requirements will then result in the dismissal of the charges. Non-prosecution agreements (NPA) are simply contracts between the prosecutor and the accused. The US Department of Justice distinguishes between DPAs and NPAs based on the procedures by which they are adopted. DPAs are filed in federal court along with a charging document and are subject to judicial approval, while NPAs are letter agreements between the Department of Justice and the entity or entities subject to an NPA.

DPAs, and similar alternative-enforcement mechanisms, act as powerful incentives for firms to disclose ethics breaches and cooperate with authorities – cooperation that leads to higher levels of enforcement. Think of ‘big bath’ accounting, all the ‘earnings management’ techniques of the old management used are disclosed and re-valued by the new management so they can start with a ‘clean slate’. So, too, with corruption and corporate fraud – new management either adopts old practices as their own and suffers the consequences, or it discloses them and moves on with its own clean ethical slate.

In today’s complex and interdependent global economy, corporate crimes are increasingly difficult to detect, deter and prosecute. This is particularly true when the alleged wrongdoing involves multiple jurisdictions, each with its own laws and enforcement procedures. NPAs and DPAs encourage disclosure, which leads to measures that deter future wrongdoing. If the terms of the NPA or DPA are breached, there is virtually an ‘automatic’ guilty verdict and draconian penalties. A typical DPA will include an admission of wrongdoing and of the relevant facts giving rise to the criminal charges, payment of a financial penalty, waiver of statutory limitation periods, cooperation with future investigations, fulfilment of strict compliance and remediation requirements, and restraint from issuing exculpatory media statements.

The lack of DPAs in Canada means that Canadian corporations are at a disadvantage compared to corporations in the US, and the UK. While a corporation may decide to disclose wrongdoing to authorities in the US in the hopes of negotiating a DPA, there is no such prospect in Canada. For multinational corporations, this poses a problem as a disclosure in the US could lead to prosecution in Canada under the relevant mutual legal assistance treaty (MLAT) between the two countries which requires the exchanging of information in an effort to enforce criminal laws.

The more draconian the penalty, the greater the need for a DPA regime; a corruption offence in Canada under our version of the FCPA (called COFPOA) can result in directors, officers or employees who are found guilty facing imprisonment for up to 14 years and debarment. Corporations may also be disqualified from bidding on certain government contracts where disclosure of criminal charges is mandatory. In Quebec, the act respecting contracting by public bodies requires automatic ‘debarment’ (disqualification) from the public sector bidding process where a corporation, or a majority shareholder, director or officer of the corporation, has been found guilty of prescribed offences in the five preceding years, including corruption of foreign officials offences. This act applies to contracts relating to construction, supply or rental of goods or services, and public-private partnerships where public funds are spent, and authorisation to participate in the tendering process may be refused for a number of other reasons. The federal integrity regime involves ‘debarment’ from federal projects for five years or more.

In 2013, the UK enacted the Crime and Courts Act permitting prosecutors to enter into DPAs. Its first DPA was approved by the British courts late in 2015, and involved Standard Bank PLC, which admitted that it had bribed foreign government officials contrary to s.7 of the Bribery Act. Key features of the UK DPA include the following. First, DPAs are at the discretion of the prosecutor and a company has to be invited to enter into a DPA. Second, DPAs will only be entered into where the public interest is not best served by mounting a prosecution. Third, the Code sets out a list of factors that the prosecutor may take into account when deciding whether or not to enter into a DPA. DPAs are unlikely to be appropriate for serious offences and early and full cooperation by the company is a key factor. Fourth, proceedings are automatically suspended where a company is charged with a criminal offence (fraud, bribery or other economic crime) and a DPA is entered into. Fifth, in the DPA, a company agrees to various conditions often including financial penalties, compensation and future cooperation. If the company does not comply with the conditions in the DPA, the prosecution may resume. Sixth, the DPA process is supervised by a judge and the court has to declare that the DPA is in the interests of justice and the proposed terms are fair, reasonable and proportionate. Finally, DPAs apply to organisations, not individuals.

The Standard Bank DPA was negotiated with the UK Serious Fraud Office (SFO) and won court approval on 30 November 2015. This arose after Standard Bank self-reported the matter to the SFO, retained solicitors to conduct an internal investigation and submitted the findings to the SFO. Standard Bank agreed in the DPA that it had failed to prevent bribery contrary to section 7 of the Bribery Act 2010. Standard Bank won a financing mandate to raise funds for the government of Tanzania. However, one of its sister banks paid 1 percent of the monies raised to a third party company which included as its chairman the commissioner of the Tanzanian revenue authority (a member of the government of Tanzania). Another director of the company was the former chief executive of the Tanzanian Capital Markets and Securities Authority. The terms of the DPA included payment of compensation of over US$7m to the government of Tanzania; payment of US$8.4m (the amount of profit on the transaction) and payment of US$16.8m (as a financial penalty) to the SFO, and payment of the costs of the SFO investigation. Standard Bank also agreed to fully cooperate with the SFO, be subject to an independent review of its current anti-bribery and corruption policies, and implement the recommendations of the independent reviewer. While that result is fair, imagine if a debarment regime were in place to quadruple the impact of the penalty and kill the bank. Businesses in any city, state or federal capital survive on doing business with government – without NPAs or DPAs, any infraction results in a guilty plea or verdict that represents ‘capital’ punishment for businesses in capitals – and no one wants that.

David Debenham is a partner at McMillan LLP. He can be contacted on +1 (613) 691 6109 or by email: david.debenham@mcmillan.ca.